AM Best
Bermuda eyes growth in the terrorism market
Many of the problems around filling the pandemic coverage gap echo similar challenges around terrorism coverage that emerged following the 9/11 attacks. Since then, Bermuda has established itself as an important centre for terrorism re/insurance coverage, as AM Best’s Edward J. Zonenberg describes to Bermuda:Re+ILS.
“Since terrorism is either excluded or included in commercial insurance, there should be no ambiguity in the policy or the coverage being provided.”
Edward J. Zonenberg, AM Best
How far back does the terrorism reinsurance business go?
Prior to the attacks on September 11, 2001, terrorism insurance was neither separately charged nor excluded in property or casualty insurance policies. It was not until after 2001 that terrorism became an explicitly identified risk, which was then excluded from the standard commercial property policies.
How has this market grown in recent years?
Take-up rates for terrorism were nearly non-existent shortly after 9/11 as insurers and reinsurers were reluctant to offer coverage given the uncertainty around this risk.
It was not until after the US Terrorism Risk Insurance Act of 2002 (TRIA) took effect that commercial insurers began offering coverage for terrorism. Since TRIA’s inception, take-up rates have risen dramatically, with some estimating it to be nearly 60 percent for the overall US economy.
Of course, this number will vary based on the location of the property, the type of property being insured and whether it is viewed as a likely target. Given the rise of gun violence in our schools in recent years, educational institutions are considered to be one of the most frequent buyers of terrorism insurance in the US.
This corresponds to higher take-up rates based on a higher perception of risk. High profile commercial buildings and targeted properties are other examples of how perception is correlated with higher take-up rates.
In which countries is there the most terrorism re/insurance coverage?
The US is the world leader in terms of terrorism coverage. This is almost entirely due to the government’s authorisation of TRIA in 2002 and the mandate that, in return, insurers must offer terrorism coverage to its policyholders upon renewal.
Government intervention was necessary in order to bring parts of the economy back, such as commercial real estate, construction, government infrastructure projects and commercial lending; these areas were practically at a standstill shortly after the 9/11 attacks.
How much growth potential do you see for this line of coverage
Growth will depend on the geopolitical climate and developments in cyber terrorism. Take-up rates have stabilised over the last few years, so there is still some growth potential. Currently, standalone cyber terrorism is a line of business covered under the US Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA).
What advantages does Bermuda have as a centre for providing terrorism reinsurance?
Bermuda reinsurers have an advantage, provided the company is a Bermuda-registered company and the terror coverage is written directly from a non-affiliated US cedant (as opposed to via an inter-group reinsurance arrangement).
The Tax Cuts and Jobs Act of 2017 eliminated the tax advantages of writing intergroup reinsurance between US onshore companies and Bermuda affiliates within the same group. Aside from this, Bermuda reinsurers have a more favourable tax regime compared with those in the UK and Europe, which is why many European companies still have a Bermuda presence.
In addition to tax advantages, there are some Bermuda regulatory advantages, eg, a more pragmatic and experienced global regulator. Bermuda also has solid underwriting expertise.
Is it a very niche business, or do many carriers offer it?
Judging by the US government’s re-authorisation of TRIPRA in December 2019, it would seem that the private market is functioning appropriately. Terrorism is not really a niche business as much as it is part of commercial underwriting.
All commercial insurers are required to offer terrorism, so it is not considered a specialty in any way. Standalone terrorism coverage, however, is often tailored for large complexes and high profile commercial buildings, and typically requires the balance sheets of larger commercial insurers coupled with significant reinsurance support.
“Prior to the attacks on September 11, 2001, terrorism insurance was neither separately charged nor excluded in property or casualty insurance policies.”
Is terrorism risk well modelled?
There has been significant progress in modelling the severity and impact of specifically identified terrorist acts. However, the frequency of these events is difficult, if not impossible, to predict accurately, as it depends on future geopolitical events which are without precedent.
Additionally, there are many types of potential terrorist acts that have not yet been identified by the modellers.
Do re/insurers have exposure to terrorism risk through other lines that may be affected?
The TRIPRA legislation has a specific process for declaring whether an incident is, or is not, deemed a terrorism event.
In these situations, the answer is unambiguously “no”. Since terrorism is either excluded or included in commercial insurance, there should be no ambiguity in the policy or the coverage being provided. If a commercial insurer is not including terrorism in the policy, it should be explicitly understood and not left to the legal system to decide.
However, for an event that is not declared a terrorism event, the interpretation depends on the specific wording of the terrorism exclusion of the policy. Also, it should be noted that all workers’ compensation policies are required to include coverage for acts of terrorism.
What else do re/insurers need to think about?
The insurance industry needs to remain aware that TRIPRA is meant only to provide a federal backstop in the event an extraordinary catastrophic terrorism event. In fact, no event has been declared as an act of terrorism since TRIA’s inception in 2002.
As such, it would be prudent for all re/insurers to take measures to ensure that they have adequate resources to cover any event without undue reliance on TRIPRA.
Additionally, companies should monitor their aggregation of limits by location and industry. Lastly, given the connectivity among businesses, reinsurers need to be cognisant of the potential vulnerabilities and the aggregation of risks relating to cyber terrorism.
Edward J. Zonenberg is a senior financial analyst with AM Best.
He can be reached at edward.zonenberg@ambest.com
Image: ElementsEvanto.com / ivankmit, Shutterstock.com / Lenscap Photography
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